Central banks could hold sway over markets

Decisions by RBI and Fed could determine market direction this week

Actions of two central banks could determine the direction of Indian stocks in the week ahead. While the Reserve Bank of India (RBI)’s decision on policy rates on Monday will likely set the tone for domestic stocks this week, the outcome of the US Fed’s two-day meet ending Wednesday, which could give some clarity on its monetary policy outlook, could have wider implications on global financial markets.

Hopes of a policy rate-repo-cut by the Indian central bank have diminished following the recent decline in the rupee against the dollar.  So, if the RBI keeps the repo rate intact, markets would not be disappointed, said fund managers.    

“With GDP growth rate being low and inflationary pressures on a downward trend, a 25-bps cut in the repo-rate was a given. But the deterioration in the rupee from Rs 52-53 against the US dollar to Rs 57-58-levels has changed the consensus,” said Rajnish Rastogi, Sr Fund Manager & Co Head- Equities, Motilal Oswal Asset Management.  “We are getting a 'no-rate-cut' policy”.  A weaker rupee makes imports more expensive, thereby adding to inflationary pressures.

Investors, however, are expecting that the RBI may cut the cash reserve ratio-the minimum amount that banks need to hold with the central bank- to ease liquidity.

“A CRR cut of 25 basis points is what some quarters of the market are looking forward to,” said Amish Munshi, Senior Fund Manager, Tata Asset Management. “With the declining rupee situation, high current account deficit numbers, markets are not expecting a repo rate-cut,” he said.

After the RBI’s meeting, investors will closely watch the Federal Open Market Committee meeting. If Fed chairman Ben Bernanke gives signals that the US central bank may cut down its bond buying program-known as Quantitative Easing 3 (QE3), it could weigh down sentiment in emerging market equities including India’s. The liquidity from QE3 has made its way to equity and bond markets worldwide.

“Markets will go up if the Fed does not indicate a time-frame for the withdrawal of the QE3 programme or if the time-frame provided is long enough. However, markets will go down if the time-frame provided is short,” said Ramanathan K, Executive Director and Chief Investment Officer, ING Investment Management.

Fund managers said the general consensus in the markets is that the Fed may consider withdrawing the QE3 beginning in September 2013.

Technical analysts said that Nifty is likely to trade in the 5700-5900 range. “The Nifty on Friday closed above the 200-day moving average of 5796 which is a positive. In the next few days, the market is unlikely to fall below the 5696 levels,” said Alex Mathew, Head of Research, Geojit BNP Paribas Financial Services.

On Friday, the NSE Nifty ended at 5808, while the BSE Sensex at 19177,

“We have observed a lot of put writing at 5700-levels which means that the markets are not expecting an immediate breach below these levels,” said Ashish Chaturmohta, Head Technical & Derivatives Analysis, Fortune Equity Brokers.